Bonds Dumped by Hot-Money ETFs Look Cheap to Invesco, Pimco

  • Brazil, Russia bond yields attractive in post-election selloff
  • Standard Life starts putting cash to work in Romania, Hungary

Two months ago, Invesco Advisers Inc. money manager Avi Hooper struggled to find a single emerging-market bond that still offered value.

That was before Donald Trump turned everything upside down.

Since the Republican’s surprise U.S. election victory, investors yanked $3.9 billion out of exchange-traded funds, until then the main driving force of this year’s rally. Invesco, along with investors like Pacific Investment Management Co., is now picking its way through the rubble, lured by bargains created by automated selling to meet withdrawals.

“When robots are forced to sell, value is presented for active managers,” said Hooper, who manages $1.4 billion from Atlanta, where he’s been scooping up bonds in Mexico, Brazil and Russia. “We were presented with the opportunity to buy bonds at levels we haven’t seen since” the start of the year, he said.

It’s a small victory for traditional mutual funds who’ve been fighting lower-cost ETFs for clients all year, and shows the potential benefit of paying more to hire a money manager who’s able to make judgment calls on asset quality during a market rout.

The selloff is giving money managers a rare opportunity to take the initiative in a new order in which passive funds call the shots on the direction of market sentiment. Of the $47 billion that poured into emerging-market funds in the first 10 months of 2016, three-quarters was allocated to ETFs, according to EPFR Global.

Read more: The rise of ETFs, a QuickTake

Unsure what would happen in the U.S. vote, money managers pushed up their cash reserves to near 15-year highs to hedge against a market downturn and the risk of withdrawals -- something an ETF can’t do because of all its cash is invested.

That also left them with money to deploy when the bond rout sent yields on emerging-market debt to the highest since Britain voted to leave the European Union in June.

Pimco’s Mark Kiesel said his firm is honing in on countries with fundamentally strong economies whose debt “may have been oversold under Trump.” Opportunities can be found in emerging markets, especially Brazil, the Newport Beach, California-based fund’s chief investment officer said in a Bloomberg TV interview Tuesday.

Bond markets swooned on prospects Trump will carry through with inflationary policies to boost spending, shrinking the value of debt lent out for three decades or more. To offset the easy money, the Federal Reserve will be forced into a faster cycle of rate increases, pushing up yields around the world.

‘Whipsawed’

That’s not to say everyone is convinced now is the time to start buying emerging markets. Nick Eisinger, government bond strategist at Vanguard Asset Management in London, said that risks -- from a referendum in Italy next month to Trump’s inauguration in January -- could spark more volatility.

“We’re remaining cautious for the time being,” Eisinger said. “You don’t want to get whipsawed.”

For Standard Life Investments Ltd., some turbulence is a small price to pay. Kieran Curtis, London-based investment director for emerging-market debt at the Edinburgh-based insurer, said he was surprised the selloff swept up countries like Hungary and Romania, which have limited trade ties to the U.S. He’s been deploying cash put aside before the election in dollar-denominated debt including Hungarian Eurobonds with the highest yields since February.

Even for countries like Mexico, with an economy bound up in U.S. trade policies, the selloff has gone so far the risk is worth taking, according to Hooper at Invesco. Mexican peso bonds yield the most in five years, at 7.44 percent for 10-year benchmarks.

“Amid the volatility you just have to be selective,” Hooper said. “A lot of names have probably already seen the lows.”

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